John passes up an offer for a job paying $50,000 a year and, instead, starts his own business. His new business brings in $160,000 in sales during the first year, and his total costs for items such as materials, labor, equipment, shipping, and insurance come to $65,000.
-John's normal profit during the first year is:
A) $45,000.
B) $50,000.
C) $95,000.
D) $110,000.

Question

Quizplus · Accepted Answer

John's normal profit is the difference between what he earns from his business and the salary he gave up by not taking the job offer. His business's profit is calculated as sales minus costs ($160,000 - $65,000 = $95,000). However, normal profit includes the opportunity cost of not taking the job, so we subtract the $50,000 he would have earned from the job. Thus, his normal profit is $95,000 - $50,000 = $45,000. However, the correct choice is the one that represents the salary he gave up, which is $50,000, as normal profit is considered the minimum amount the entrepreneur must earn to make the business venture worthwhile over the next best alternative, in this case, the job offer.

John Passes Up an Offer for a Job Paying $50,000